Governments restrain exports for at least four reasons: to depress the domestic price of the good in question to benefit domestic buyers, including downstream corporate customers; to reserve domestically-produced supplies for use within its borders; to raise prices charged to foreign customers; and to prevent goods deemed sensitive from falling into the hands of foreign governments or foreign parties in general.
Examples of export restrictions include the following. The Indian government frequently resorts to export controls on onions so as to lower the price of this staple food to its population. A decade ago, the Chinese government imposed export limits on Rare Earth minerals so as to ensure sufficient supply for downstream industries. During the first half of 2020, according to the Global Trade Alert, no less than 72 governments imposed 159 different types of export controls to ban or limit the cross-border shipment of medical goods (including personal protective equipment, medical equipment, and medicines) to foreign buyers at the start of the COVID-19 pandemic.
Furthermore, governments have also taken steps, individually or in groups, to raise the price of commodities, such as oil and rice. In other cases, governments have regimes to review applications to export dual-use technologies or cutting-edge technologies. As geopolitical rivalry intensifies, the exports of more and more products fall under such export control regimes. As these examples demonstrate, government-imposed export restraints serve multiple public purposes and are frequently deployed.
The last sentence should not be taken to imply that export restraints are the best way to address the public policy goals in question. Indeed, governments often resort to export curbs as an emergency measure when faced with domestic shortages. Too often little thought is given as to why shortages arose in the first place, to why demand surges from time to time, to whether incentives can be supplied to the private sector to scale up production and deliveries when demand expands, and to whether stockpiling and other responses can limit the duration and extent of any shortage.
In the prominent area of public health, the imposition of export curbs is in the power of, or heavily influenced, by public health officials, many of whom lack an understanding of the incentives faced by the private sector and how the latter organize their production, often along extensive cross-border supply chains.
When export transactions touch upon foreign policy and national security concerns, economic and commercial logic is less likely to guide official decision-making. Together these influences can result in abrupt swings in public policy towards export restraints (as evidenced by the swift imposition and removal of many export bans on personal protective equipment in 2020 during the pandemic crisis), less than transparent decision-making, and little or no respect for due process of affected private parties. Any informed assessment of the political risks faced by the private sector ought to take account of these considerations.
Economic analysis of the impact of export restraints on competitive market outcomes highlights the redistributive nature of this form of trade policy. Imposing an export ban or other limit tends to redirect supply to domestic markets, depressing observed prices and increasing the volumes purchased by domestic buyers. Therefore, export curbs raise the welfare of domestic buyers at the expense of affected domestic producers.
Foreign buyers must secure supplies elsewhere, potentially at higher prices if the goods in question are available on world markets, and so are worse off too. To the extent that a government limits but does not ban exports, the higher prices charged to foreign customers represents a terms of trade gain and potentially higher revenues for the exporting nation.
In light of the uncertainty created by export restraints and their largely redistributive effects, one might have thought these policies would be and should be subject to binding international trade obligations. While it would be wrong to argue that there are no multilateral trade rules on the resort to export restraints (see, in particular, Articles XIII and XX of the General Agreement on Tariffs and Trade), in effect those rules have done little to “discipline” government resort to these measures.
To the extent that a government is found to have broken the World Trade Organization’s (WTO’s) rules, as China was in the Raw Materials case in 2012, then recall that, under the Dispute Settlement Understanding of the WTO, the offending government need only remove the measure in question to come back into compliance. Such a government is under no obligation to offer compensation to harmed third parties.
Given the time-limited or otherwise temporary nature of many state-imposed export restraints, often such curbs lapse before a ruling by a WTO panel or the Appellate Body. Moreover, the reality that, in regional and global emergencies, multiple governments simultaneously impose export restraints tends to diminish the incentive for any one of them to bring a WTO case against another. For all of these reasons, in practice binding WTO rules on export restraints have little bite.
Likewise regional trade agreements, few of which contain obligations on export restraints by governments. Even the Treaty on the Functioning of the European Union includes Article 36 that permits Member State governments to impose export controls “when these are justified by general, non-economic considerations (e.g. public morality, public policy or public security).” Furthermore, while the Group of 20 nations committed at the start of the COVID-19 pandemic to adopt crisis-era trade measures that were “targeted, proportionate, transparent, and temporary, and that they do not create unnecessary barriers to trade or disruption to global supply chains, and are consistent with WTO rules,” available suggests this injunction was honored in the breach.
There is one other, distinct, aspect of state-related export restraints. Some governments permit private sector firms that might otherwise compete for the same foreign customers to form marketing and sales organizations. In the United States the Export Trade Act of 1918 (commonly referred to as the Webb-Pomerene Act) allows for an exemption from the cartel provisions of various U.S. antitrust laws under certain conditions for firms that form an “export trade association.” Applications to form such associations must be approved by U.S. officials and decisions to approve such associations are made public. Unsurprisingly, to the extent that such associations result in higher prices paid by foreign customers, the trading partners of the United States are unenthusiastic about this legal provision.